Hotels Begin To Build Again
The new hotel development pipeline generally has remained dormant during the past few years, but now more than 280 new projects, amounting to 35,600 rooms, were announced in the second quarter of the year, according to data recently released by Portsmouth, N.H.-based consulting firm Lodging Econometrics.
This represents the highest quarterly new guest room count in more than two years and signals the start of a new construction cycle. These increases, however, still are relatively modest, compared to the overall U.S. lodging inventory and none of the hotels will open to the public for another two years.
"Projects announced today won't affect supply until 2006 or beyond," said company president Patrick Ford.
Ford said Lodging Econometrics stood by its annual projections made in January that supply growth would rise by a minor 1.2 percent in 2004 and 1.3 percent in 2005.
The majority of the new hotel projects are in the midprice category, relatively small and in suburban and highway locations. This is consistent with much of the hotel growth in the last construction cycle.
By contrast, fewer of the new hotels will be full-service and in downtown, central business districts in primary markets, where barriers to entry are greatest. "The exception will be hotels constructed in central business districts where convention centers are built or expanded," Ford said.
The first quarter of the year saw an increase in the number of new hotel announcements as well. "The fact that increases occurred for two quarters in a row is a sign that the pipeline has stopped bottoming out. The new construction cycle should last for three or four years," Ford said. Consequently, the industry can expect to see new hotels opening through the end of the decade.
Modest supply growth is good news for existing hotels, if less so for travel buyers. Existing hotels do not want the additional competition that accompanies new supply coming into an area. Buyers, on the other hand, have more negotiating options when new properties enter a market. Frequently, they can negotiate particularly attractive rates in return for agreeing to bring room nights to an untested hotel. Especially in crowded markets, owners of new hotels are eager to encourage trial usage by corporations to build a base of business.
In terms of hotel revenues, "supply should be a non-factor through at least 2006," said William Crow, lodging analyst for Raymond James & Associates. "New lodging supply growth of about 1.2 percent is far below the historical average of 3 percent and the recent cyclical peak of over 4 percent set in 1999."
Ford attributed the jump in the number of new projects to an increase in developer confidence. "The geopolitical situation has stabilized and both the economy and the lodging industry's performance has improved for more than a year," he said.
The capital markets also have loosened considerably, making it easier for developers to obtain financing. In fact, competition among banks to make loans has become intense in many markets.